Menu Close

Why Is American Healthcare So Expensive?

Person in hospital

The United States spends more on healthcare in comparison with any other developed country, however, many American citizens don’t necessarily find this spending to be worth it in terms of better care. In fact, studies show that the United States is the country with the most dissatisfaction with its healthcare system, with 34% of people voting for a complete rebuilding of the American healthcare system. One contributor to the dissatisfaction of the healthcare system may be due to its cost, and this has been a huge issue in politics, as the cost of healthcare has been the subject of political debate in the United States.

In 2017, the United States spent $3.4 trillion on healthcare, which averages to around $11,000 per person, and this is more than two times higher than the average in other developed countries.

However, one subject of controversy in the United States is the lack of universal healthcare, as all developed countries with the exception of the US have a universal health coverage system, and these countries spend significantly less per capita on healthcare compared to the US.

In 2010, the Affordable Care Act, commonly referred to as Obamacare, was introduced to the United States as an insurance mandate requiring all citizens to have health insurance, while also offering assistance to those who could not afford health insurance. While this major reform to the US healthcare system was significant, the cost of healthcare spending in the US is still continuously growing in proportion to its gross domestic product (GDP).

“It was a long battle, carried out in Congressional hearings and in the public square for more than a year…But ultimately, after a century of talk, decades of trying, and a year of bipartisan debate, our generation was the one that succeeded. We finally declared that in America, health care is not a privilege for a few, but a right for everybody.”

President Barack Obama on the Affordable Care Act, also known as Obamacare
This was an ad for Blue Shield in the 1930s! Image Source

High administrative costs contribute towards the cost of American healthcare

One major contributor to this cost are administrative costs, which are much higher in the US compared to other countries, as 8% of the US healthcare spending is spent towards administrative costs, compared to 1% to 3% in other countries.

This is due to the third party reimbursement system in the US, with different insurance enrollment dates, plans, coverages, deductibles, copays, coinsurance, and other confusing regulations that contribute to administrative costs dedicated to dealing with billing and coding. In addition, the insurance system in the US is a for-profit system, which contributes to high insurance rates and cost of healthcare.

In the beginning, health insurance started out as a charitable system that charged the same price for all patients to help patients and support philanthropic hospitals funded by religious groups. However, this system, BlueCross BlueShield, that was originally intended to be charitable was outcompeted by insurance companies that wanted to profit off of healthcare by mostly insuring the young and healthy, and basing costs on the age and health of the patient.

Eventually, all the major insurance companies became for-profit businesses, with aggressive marketing tactics to make money and gain market shares, which was far from the original intention of BlueCross BlueShield when they began as a way to provide “high-quality, affordable health care for all.” To make money, many insurance companies have been increasing insurance premiums and other costs. In fact, according to the National Conference of State Legislatures (NCSL), the cost of insurance premiums for families rose nearly 5% in 2018.

A similar issue is the inefficiency and lack of transparency in healthcare billing, as medical bills can often be complicated. In fact, a study published in JAMA, researchers found that a single visit to a primary doctor cost $20 in overhead costs due to billing, which equals $99,000 per physician annually.

Billing errors and the complicated medical billing process can also contribute to this administrative costs, as errors require rebilling and additional costs. In the US, one medical bill could have many different payers, further complicating the process. Studies have also found that the error rate of medical billing for Medicare was around 9.5%, and this resulted in $36.2 billion in additional costs.

For many Americans, the medical billing system is complicated and hard to understand because of the medical codes used to record the diagnosis, called the ICD-10 codes, and to record the tests and treatments needed, called the CPT codes. However, while these codes are an efficient classification for the different types of diseases and conditions, these codes are also confusing for patients, making it hard to determine the true cost of their medical care.

Physicians also have a higher incentive to justify more medical codes, as more codes means more reimbursements. Nevertheless, there are serious consequences for medical coding fraud, but this lack of transparency provides to be an issue, as in an article by the Wall Street Journal, it was reported that one hospital charged more than $50,000 for a knee replacement surgery that only costs $7,300 to $10,550.

With the lack of transparency in combination with other administrative issues, the complicated insurance system in the US significantly increases its healthcare spending.

This graphic shows the increase in prescription drug costs! Image Source

Rising drug costs are also contributing to healthcare spending

Yet, rising drug costs are another issue contributing to the high cost of healthcare. According to the Centers for Medicare and Medicaid Services, spending on prescription drugs rose 40% from 2007 to 2017. In most developed countries, including France, Germany, the United Kingdom, and Japan, there are limits to drug price increases, while the US allows the free market to decide drug prices.

One reason for this increase in the US is the monopoly pharmaceutical companies have over brand-name drugs, where pharmaceutical companies can increase the drug prices without competition from other brands. One example of this is insulin, as in the US, the average price of one vial of insulin is $285. A reason for this is because only three companies – Eli Lilly, Novo Nordisk and Sanofi – make up 90% of the world’s insulin supply, creating a monopoly in many countries.

In a poll by the Kaiser Family Foundation, 24% of people had trouble affording their prescription medications, and the average spending on medication in the US was $1,443 per person compared to $749 in other developed countries. In addition, major government insurance programs, such as Medicare, are not allowed to negotiate drug prices while private insurance companies can.

All of these factors contribute to rising drug costs, which further increases US spending on healthcare.

Defensive medicine may increase healthcare spending by $25.6 billion yearly

Every year, there are 40 million lawsuits filed in the US each year, and this includes many medical lawsuits. That means that physicians and other medical professionals need to practice “defensive medicine,” which is a practice to prevent lawsuits by recommending diagnostic tests that serve to protect the medical professional from lawsuits, even though the tests may not be necessary. This can increase the medical bill, as an analysis published in Health Affairs estimated that defensive medicine increases healthcare spending by $25.6 billion yearly.

Additionally, many diagnostic tests, such as CT scans, are significantly more expensive in the US. To illustrate, in the US, the average cost for an CT scan is $896, compared to $97 in Canada and $500 in Australia. However, why are these tests so expensive in the US? Prices of tests and treatments can vary greatly depending on the insurance, as negotiation often happens behind the scenes.

In addition, medical professionals are paid more than in other countries, as the average salary of a family doctor is $218,173, while a doctor in the United Kingdom could expect to make around $75,000 yearly. However, while it may seem like doctors in the US are paid much more, medical school in the US is also incredibly expensive, as the average amount of medical school debt is $241,600. This cost of labor, in addition to the high drug prices, can rack up on medical bills, and along with the rise of chronic diseases and obesity, contributes to the high national spending on healthcare.

Despite these high prices, Americans aren’t receiving better care or having better accessibility to health services. According to data by the KFF, 26% of adults in the US reported that they had trouble paying for medical bills in the past year, and many of these people reported having a major impact on their family. Many Americans are also avoiding medical treatment because of cost, as around 22% of Americans reported skipping medical care because of the cost.

In addition, the life expectancy in the US is 78 years old, while the average life expectancy of other developed countries is around 82 years, making the life expectancy in the US one of the lowest among developed countries.

This brings up the question, are Americans really getting the best bang for their buck? With the highest healthcare spending compared to all other countries but one of the lowest life expectancies and lowest satisfaction with their healthcare, the US healthcare system is in need of reform.

“We should learn from Japan that covering everyone in a systematic way is necessary to hold spending down as well as being the right thing to do… The most distinctive aspect of the decision-making process is that the overall amount for spending is decided first, in a negotiation between the Ministry of Finance, the Liberal Democratic Party, the Ministry of Health, Labor and Welfare and the Japan Medical Association.”

John Campbell, Professor Emeritus of political science at the University of Michigan

One country that has an efficient and satisfactory healthcare system is Japan, which is often ranked highly in terms of affordability and overall care, only spends about 8.2% of its GDP on healthcare, compared to 18% in the US. As the recent pandemic has shown, the United States is undoubtedly in need of a reform of its healthcare system.

Bibliography

Aspril, J. (2019, January 08). U.S. Health Care Spending Highest Among Developed Countries. Retrieved December 18, 2020, from https://www.jhsph.edu/news/news-releases/2019/us-health-care-spending-highest-among-developed-countries.html

Bloom, E. (2019, October 14). Here’s how much the average American spends on health care. Retrieved December 18, 2020, from https://www.cnbc.com/2017/06/23/heres-how-much-the-average-american-spends-on-health-care.html

Ellis, R. P., Chen, T., & Luscombe, C. E. (2014). Comparisons of Health Insurance Systems in Developed Countries [PDF]. Boston, Massachusetts: Encyclopedia of Health Economics.

Slaybaugh, C. (2019, July 02). International Healthcare Systems: The US Versus the World. Retrieved December 18, 2020, from https://axenehp.com/international-healthcare-systems-us-versus-world/

Rosenthal, E. (2017). How health insurance changed from protecting patients to seeking profit. Retrieved December 18, 2020, from https://stanmed.stanford.edu/2017spring/how-health-insurance-changed-from-protecting-patients-to-seeking-profit.html

Wang, P. (2018, August 01). Sick of Confusing Medical Bills? Retrieved December 18, 2020, from https://www.consumerreports.org/medical-billing/sick-of-confusing-medical-bills/

Reed, J. (2020, September 23). Why insulin is so expensive. Retrieved December 18, 2020, from https://www.businessinsider.com/insulin-lifesaving-prescription-drug-so-expensive-pharma-industry-2019-1

Why are Prescription Drug Prices Rising and How Do They Affect the U.S. Fiscal Outlook? (2019, November 14). Retrieved December 18, 2020, from https://www.pgpf.org/blog/2019/11/why-are-prescription-drug-prices-rising-and-how-do-they-affect-the-us-fiscal-outlook

Kirzinger, A., Muñana, C., Wu, B., & Brodie, M. (2020, February 06). Data Note: Americans’ Challenges with Health Care Costs. Retrieved December 18, 2020, from https://www.kff.org/health-costs/issue-brief/data-note-americans-challenges-health-care-costs/

How Does the U.S. Healthcare System Compare to Other Countries? (2020, July 14). Retrieved December 18, 2020, from https://www.pgpf.org/blog/2020/07/how-does-the-us-healthcare-system-compare-to-other-countries

Hohman, M. (2020, September 22). Why is health care so expensive? 5 reasons bills are higher in the US. Retrieved December 18, 2020, from https://www.today.com/tmrw/why-healthcare-so-expensive-united-states-t192119

Staff Author. (2020, August 29). 6 Reasons Healthcare Is So Expensive in the U.S. Retrieved December 18, 2020, from https://www.investopedia.com/articles/personal-finance/080615/6-reasons-healthcare-so-expensive-us.asp

Torrey, T. (2020, February 27). Defensive Medicine and How It Affects Healthcare Costs. Retrieved December 18, 2020, from https://www.verywellhealth.com/defensive-medicine-2615160

Probasco, J. (2020, September 21). Why Do Healthcare Costs Keep Rising? Retrieved December 18, 2020, from https://www.investopedia.com/insurance/why-do-healthcare-costs-keep-rising/

Kamal, R. (2020, September 02). How does U.S. life expectancy compare to other countries? Retrieved December 18, 2020, from https://www.healthsystemtracker.org/chart-collection/u-s-life-expectancy-compare-countries/

Roehr B. (2007). US has highest dissatisfaction with health care. BMJ : British Medical Journal, 335(7627), 956. https://doi.org/10.1136/bmj.39388.639028.DB

Blendon, R. J., Brodie, M., Benson, J. M., Altman, D. E., & Buhr, T. (2006). Americans’ views of health care costs, access, and quality. The Milbank quarterly, 84(4), 623–657. https://doi.org/10.1111/j.1468-0009.2006.00463.x

Gross, D. J., Ratner, J., Perez, J., & Glavin, S. L. (1994). International pharmaceutical spending controls: France, Germany, Sweden, and the United Kingdom. Health care financing review, 15(3), 127–140.

Posted in Healthcare

Check these out!

Leave a Reply

Your email address will not be published. Required fields are marked *